Newton cuts divi on Higher Income fund by 20-25%

BNY Mellon Asset Management has rationalised its UK equity range by merging away two funds, and has cut the dividend target on its flagship Higher Income fund.

Newton said it had taken the decision to rebase the dividend distribution on Tineke Frikkee's Newton Higher Income in response to the challenging market environment, characterised by low returns and low yields across asset classes, which means the current dividend payment is unsustainable.

It said a more realistic payout is estimated to be around 20%-25% lower than that made over the last 12 months.

The change will give Frikkee the flexibility to invest across the spectrum of UK equities.

Newton chief investment officer Jeff Munroe said: 'The US Federal Reserve’s indication last month that they plan to hold interest rates at near zero through to mid-2013, has reaffirmed our belief that unprecedented low interest rates will remain. This reflects the deleveraging and low growth environment that the developed world is experiencing. Companies will therefore find it more difficult to provide dividend payments in line with those they were able to deliver during periods of strong global economic growth. '

He added: 'In this environment supporting the current dividend level would increasingly affect the Newton Higher Income Fund’s overall return to investors. The change will give us increased flexibility to invest across the spectrum of UK equities. The fund will have access to a wider range of high quality companies paying dividends that are higher than the average in the UK equity market, and also provide greater potential for capital growth.'

15 years of dividend growth

The £2.5 billion Higher Income fund has one of the strictest yields disciplines among its peer group and has attracted a strong following on this basis. Over the last five years the fund has yielded 4.6%, 5.7%, 7.2%, 7.6% and 7.9% on an annual basis.

While IMA rules require income funds to yield 110% of the FTSE All Share Newton has traditionally gone beyond this, only targeting stocks that generate more than 115% of the yield of the All Share.

Newton has always taken great pride in its track record and strict discipline. Frikkee recently said the fund remains on track to deliver 3% annual dividend growth in the year to the end of June 2011, which would 'maintain its excellent record of growing its income for the past 15 consecutive years.'

'This contrasts markedly with the 10% decline in UK market dividends paid during 2008 and our previous forecast of a 10% decline in UK market dividends in 2009,' Frikkee explained.

However, this regimented approach means the fund at times loses out on capital growth opportunities, which is reflected in it recent performance. On a total return basis the fund has returned 21.4% in the three years to the end of July versus a 22.8% gain in the FTSE All Share. In the 12 months to the end of July the fund has returned 10.9% versus a 14.9% rise in the benchmark.

BNY Mellon Asset Management head of international distribution Paul Feeney said clients had accepted the decision: 'Our clients have appreciated the need for us to drop the yield on the Newton Higher Income Fund to a more sustainable level. We intend to still remain in the top 10% of income payers in our peer group. As such, the Newton Higher Income Fund will continue to be one of the most attractive equity income funds for income seeking investors.'

Frikkee's view of the world

In her latest fund update at the end of July Frikkee underlined the headwinds her fund was facing. 'Economic growth remains low in developed markets and inflation is causing concern in emerging markets. Although risks abound, there remain attractive opportunities to invest in income-producing stocks which provide a growing income stream.'

It would appear that last month's volatility has forced Frikkee's hand with the FTSE losing 6.6% in August and the FTSE All Share slumping 8.7%.

Running into the month GlaxoSmithKline was Frikkee's biggest holding at 9.4%, with Shell and HSBC both accounting for 6.2%. In sector terms her biggest overweight was utilities, with basic materials the biggest underweight.

Fund mergers

Meanwhile, subject to regulatory approval the Newton UK Equity fund and Newton Growth fund will be merged into the Newton Income fund and be renamed Newton UK Equity fund.

The new fund will have £1.3 billion worth of assets and be managed by Richard Wilmot with Ben Russon as alternate manager.

Munroe said: 'This move is designed to better position our UK range in the eyes of our investors. The newly merged Newton UK Equity fund is well positioned to take advantage of a large number of opportunities in the UK equity market at attractive valuations.'

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